Knowing that you have been given an inheritance can be a heartwarming moment. If you are in a tight financial situation, it can also be a lifeline that could relieve some of your money troubles. However, one common worry of people who are about to inherit money or property is whether their inheritance can be seized by debt collectors.
The answer to the question “Can debt be collected from my inheritance?” will depend on who owes the debt.
Do you owe the debt? Or are you worried about the debts of the person who gave you the inheritance? In this article, we will discuss the different scenarios in relation to debts and inheritance.
You are About to Inherit Assets and You are the One With the Debt
If you are the one with debts, the short answer is YES. It is possible for debt collectors to collect money from you if you are suddenly awarded an inheritance. When an inheritance is distributed, this is a matter of public record so the creditor will be able to see if you have assets. The will of a deceased person will have to be filed in a local court and after this, the will goes through probate which is the process of proving the will and distributing assets. Once the probate is completed, the will becomes a public record and can be accessed by anyone.
The way your inheritance could be collected will be different depending on who you owe the money to or at what stage the debt collection process is.
1. I Have Tax Debts. Can the IRS Collect my Inheritance?
Yes. If you inherited money, the IRS can levy your bank account to collect the money you owe. The IRS does not need to file a lawsuit to levy your bank account if your tax debts are less than 10 years old. In some cases, the IRS can also appoint a private collection agency to recover inactive tax debts. It is also possible for the IRS to file a lawsuit to extend the time they can collect from you for 20 more years. That means they will have 30 years to collect your tax debt.
If you inherited a property, the IRS can place a tax lien on your house. When a lien is placed on your house, this means that the government has a claim on your house. If you decide to sell it, they will recover your debts from the sale of your house before you can get the profits.
However, don’t be worried that the IRS will just seize and sell your house outright without you knowing it. The IRS has to go to court, file a lawsuit, and get a judge to agree to sell your house to pay off your tax debts. Even if you have inherited the property mortgage-free, meaning you have 100% equity on the inherited house, the IRS cannot foreclose on you without getting a judgment from the courts.
There is also another factor that could work in your favor if the house is covered by a Homestead Exemption. Homestead Exemption can limit what can be claimed by creditors to collect debt. In some states, your inherited property cannot be seized or sold to settle a debt if the equity that you have on the house is less than the Homestead Exemption amount set by your state. Different states have different homestead exemption amounts and there are also states like Florida and Texas that have no dollar limit which lets you keep 100% of the inherited property.
For example, you live in Texas with your mother who owns the house. When your mother passed away, you inherited the house from her. The homestead exemption laws in Texas will allow you to keep 100% of your inherited property so the IRS cannot seize or sell the property.
2. I Have an Existing Lawsuit or Judgment from a Debt I Owe. Can the Judgment Creditor Seize my Inheritance?
The answer is YES but it will depend on the status of the lawsuit. If the lawsuit is ongoing, you have the obligation to disclose all the assets that you have including the inheritance that you are about to receive. If the judgment creditor wins the lawsuit, your bank account can be levied or they can also put a lien on your property (provided that it is not covered by Homestead Exemption).
If the judgment was issued already before you were even made aware of the inheritance, it will be more difficult for the creditor to collect from you.
For example, a creditor sued you in court and won a judgment but cannot collect money from you because you are judgment proof. Being judgment proof means you do not have enough assets that can be seized to collect the debt you owe. Then, let’s say after the lawsuit was finalized and after some time has passed, you discovered that you are going to receive an inheritance. At this point, you are no longer obligated to inform your creditor that you are about to receive money.
The only way the creditor can collect from you is if they are aware of your inheritance. They can do this by periodically monitoring your assets or by trying to levy your bank account. Take note that creditors can levy your bank account more than once to try to recover the entire amount that you owe.
3. I Have Too Much Credit Card Debt. Can my Inheritance be Collected to Pay These Off?
The only way your creditor can collect a debt from your inheritance or levy your bank account is if they file a debt collection lawsuit against you and win a judgment from the courts. If you are only being threatened by debt collectors but have not received any summons from the court, you should not be worried that they can directly have access to your inheritance.
If you receive summons from the court about a debt lawsuit, you should not ignore these summons. You have to respond and appear in court to make sure that the creditor will not win a default judgment. A default judgment usually happens if you are absent from the court hearing so the judge decides in favor of the judgment creditor. When the creditor wins a judgment, that is the only time that they can levy your bank account or try to collect from you.
4. I Have Old Unpaid Debts. Can Creditors Still Collect from my Inheritance?
This will depend on how old your debt is. In the United States, creditors are allowed a number of years to take legal action so they can collect a debt. This is called the Statute of Limitations.
Depending on the state that you live in, the Statute of Limitations to collect a debt can be from 3 to 15 years. If your creditor has not filed a lawsuit within that period, then they cannot take any more legal action or get a judgment to collect the debt if that period has passed.
If your debt has not reached the statute of limitations, the creditor can still file a lawsuit to try to collect your debt. If there is an existing judgment against you that the creditor has not collected yet, they can only collect if they are aware of your inheritance.
You are Inheriting from Someone With Debts
If you are to receive an inheritance and the person you are inheriting from has debts, you might be worried if your inheritance can be used to pay off that person’s debts. You will be relieved to know that even if you inherit assets like money and property, you will not be liable or responsible for that person’s debts.
When a person dies, that person’s “estate” will be responsible for any unsettled affairs, including debts. The estate will have an executor who is authorized to manage the person’s estate. This will be the person who is also authorized to distribute inheritance, etc. Usually, the person’s debts will be settled before assets and inheritance are distributed.
If you were given an inheritance and debt collectors come knocking at your door telling you that you have the moral responsibility to pay off that person’s debts, don’t believe them. If you are not the person authorized as the executor of the estate, you should direct calls from debt collectors to the appointed executor.
If you are inheriting from your spouse, this will depend on your state’s laws if you will be responsible for the debts your dead spouse might owe. In most cases, you are not but it is better to consult with a lawyer to see whether you can protect the inheritance from your spouse if your spouse left unpaid debts.
The only instance you could be responsible for the debt of the person who left you the inheritance is if you are jointly responsible for the debt, like if you are a co-signer for the loan. For example, if you cosigned a car loan with your brother and your brother passed away, you will become liable for the car loan or else it could be repossessed.
What Can You Do to Protect Your Inheritance from Debt Collectors?
If you are about to receive an inheritance and you are not sure whether debt collectors have claims to what you are about to receive, the best course of action is consult a lawyer. A lawyer can advise you on the best step depending on your personal situation.
If you have debts, you can choose to disclaim the inheritance and pass it on to your children to avoid debt collectors from getting a hand on it. If the person who gave you an inheritance has debts, the lawyer can also check whether you are liable to pay off the debts depending on what assets you are exactly inheriting.
While this may be an additional expense, getting professional legal help could save you a lot more especially if your inheritance is quite sizable.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
